On advisor regulation, the new year has seen a continuance of the ongoing head scratching over what to do about increasing the number of SEC advisor exams. Meanwhile, there’s a growing debate about whether there is an advisor exam-deficiency dilemma at all—or that the so-called problem is just another political football.
Industry participants, regulators and lawmakers continue to toss out ideas on how to increase the number of exams—boost Securities and Exchange Commission funding (which did happen with the year-end passage by Congress of the continuing resolution omnibus spending bill), charge advisors user fees, use third-party audits or push more exams onto the states—yet no real solutions have been solidified after years of grappling over the issue (sounds a lot like the fiduciary debate).
Industry trade groups will put quite a bit of their lobbying efforts this year into trying to secure Senate support for a bipartisan bill that allows the SEC to levy user fees on advisors to help boost the number of advisors that do get examined.
California Democrat Rep. Maxine Waters attempted to get her user-fee bill, H.R. 1627, the Investment Adviser Examination Improvement Act of 2013, reintroduced by attaching it to H.R. 37, the package of 11 bills intended to roll back Dodd-Frank that passed the House in mid-January, but it was quashed by House Republicans.
What Your Peers Are Reading
It’s safe to say that the issue that perplexes the industry most is why the SEC spends half of its exam budget on broker-dealers when examining BDs is the Financial Industry Regulatory Authority’s primary job.
The obvious conclusion: SEC Chairwoman Mary Jo White believes that broker-dealers present more risks than advisors do. When House Financial Services Committee lawmakers directed her to reallocate more of the agency’s Office of Compliance Inspections and Examinations’ resources toward that endeavor, she said she’s not confident in FINRA’s ability to police BDs alone.
“If there are more advisors than there are BDs, and the BDs already have a first layer of regulation under FINRA, what is this gargantuan organization called FINRA doing?” asked Brian Hamburger, founder of the New Jersey-based Hamburger Law Firm and its affiliate, MarketCounsel, which offers RIA compliance services.
Hamburger is among a growing body of industry observers who are questioning whether there really is an advisor exam problem. Are advisor exams “just an issue that is a politically polarizing [one] … because people are scared about rogue advisors?” he wondered. If the low advisor exam rate is a “real risk, then the SEC would be acting in accordance with that risk—but they’re really not,” Hamburger said. The second biggest portion of OCIE’s budget goes to investment companies, he noted.
“I don’t think there is a major exam deficiency problem,” agreed Duane Thompson, senior policy analyst at fi360. “To confirm whether there is indeed a problem,” Thompson argued that it “might be helpful to have the Government Accountability Office undertake a facts-based review and avoid the [Bernie] Madoff histrionics that set off the whole [advisor exam] controversy.”
Looking “objectively at the last 30 years,” the advisor “exam cycle today of about 10% is not that far off the historic 11% average,” Thompson said. “So why the sudden fuss?”
What About Third-Party Exams?
Thompson suggested that the SEC may be better off considering independent third-party reviews—that is, reviews performed by “independent fiduciary analysts or compliance firms,” not self-regulatory organizations like FINRA—instead of relying on sporadic funding from Congress.
An SEC spokesperson did say that the $150 million budget increase the agency recently received would permit it to increase its exam coverage.
But the SEC continues to be “very opaque in the resources that it brings to advisor exams,” Hamburger said. Indeed, OCIE chief Andrew Bowden remains tight-lipped about exactly how he’ll use those newly allocated funds to boost advisor exams, declining to comment when I inquired recently.